CEPL (CEPL) Q1 2027 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Capstone Energy+ Fiscal First Quarter 2027 Earnings Conference Call and Webcast. Today's call will cover the company's financial results for the fiscal first quarter ended June 30, 2026. [Operator Instructions] As a reminder, today's conference call is being recorded. It is now my pleasure to turn the call over to Alfredo Gomez, General Counsel of Capstone Energy+. Alfredo, please go ahead.

Thank you very much. Good afternoon, and thank you for joining Capstone Energy+' Fiscal First Quarter 2027 Earnings Conference Call. On the call with me today are Vince Canino, the company's President and Chief Executive Officer, and John Miller, the company's Board Member and Interim Chief Financial Officer. Today, August 12, Capstone Energy+ issued its financial results for its fiscal first quarter 2027, which ended June 30, 2026. During today's call, we will be referring to slides that can be found on the company's website under the Investor Relations section. This conference call contains forward-looking statements representing the company's views as of today, August 12, 2026. Other than as required by federal securities laws, the company disclaims any obligation to update or revise these statements to reflect future events or circumstances. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are in some cases beyond our control. Please refer to the safe harbor provisions set forth on Slide 2 of the accompanying presentation in today's earnings release and in Capstone's filings with the Securities and Exchange Commission for more information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements. Please note that as Mr. Canino and Mr. Miller go through the discussion today, when they mention EBITDA, they're referring to adjusted EBITDA, which is a non-GAAP financial measure, and the reconciliation to net income can be found in the earnings release and the appendix to the presentation slides. I would like to now turn the call over to Vince Canino, the company's President and Chief Executive Officer.

Thank you, Alfredo, and good afternoon, everyone. Thank you for taking the time to join us today as we share our progress and outlook during what I believe is an exciting energy renaissance. Let's move to Slide 4. The first quarter of fiscal '27 marked another important step in Capstone's evolution. During the quarter, we achieved several significant milestones that are worth highlighting. First, we officially launched our broader market identity as Capstone Energy+. Second, following our successful uplisting to NASDAQ, we began trading under the ticker symbol CEPL. Third, we continue to make meaningful progress in the data center market. While we have not yet signed a customer agreement, we are seeing a growing awareness and interest in how Capstone Energy+ can help address community concerns while enabling additional power generation capacity with lower emissions. Customers increasingly understand the role our solutions can play in supporting this rapidly growing market. Before John walks you through the financial results, let me frame what I believe is the most important takeaway from the quarter. What these results demonstrate is that we have built a business capable of navigating turbulence while continuing to generate profits. Despite these dynamics, our underlying earnings profile continued to improve. We expanded gross margin a full percentage point in products and accessories, mainly driven by our ongoing DFMA cost reduction initiatives. We generated positive net income and meaningfully stronger operating cash flow. That combination, despite a lower revenue base, achieved higher-quality earnings. That is the real story of the quarter. It demonstrates that the cost discipline and operational rigor we have spent the past 2 years building are paying off. Our strategy has never depended on a single market opportunity. Instead, it is built around providing resilient, on-site energy solutions wherever reliable power is needed. Our 3-pillar framework continues to guide every decision we make. The question we ask ourselves each day is not how successful are we becoming? Instead, we ask, are we creating value for our customers and shareholders? Are we helping customers solve meaningful problems? Are we making those around us better? When we do these well, we build trust. When we build trust, we create impact. And when we create impact, success becomes a byproduct rather than an objective. Now let's move to Slide 5. This slide represents who Capstone is and why we exist. We are leaders in a technology that many attempted, many failed to perfect and many ultimately walked away from, yet Capstone persevered. At the heart of Capstone is an elegant technology, a single moving assembly riding on a cushion of air. No friction, no oil, no coolant, no lubricants. No friction means lower noise. No oil means no oil carryover that can contaminate the combustion process. No coolant and no lubricants mean fewer auxiliary systems that can fail and take a unit offline. For more than 3 decades, we have proven this technology in the field, competing in an industry dominated by some of the world's largest power generation companies. It is true that we entered the behind-the-meter data center opportunity later than some others. However, we have created growing awareness and interest in Capstone Energy+ and the unique role our solutions can play. Through our technology and our decades of operating experience, we are helping customers think beyond how they generate, manage and optimize energy. And that is why we remain excited about the opportunities ahead. Now, let's move to Slide 6. As I mentioned earlier, we have been engaged in discussions with a wide range of companies across the data center ecosystem. As we developed our reference design and explored different energy strategies and deployment approaches, something interesting happened. During a visit by a major data center infrastructure company at our manufacturing facility, they asked the simple question, can you whiteboard your value proposition? So we did. We began listing the reasons we believed Capstone Energy+ could be a compelling behind-the-meter power solution. As the conversation evolved, we worked together to categorize each benefit according to the value attributes that matter most to the data center operators. What emerged is something more authentic, more practical and more closely aligned with the needs of the people who will ultimately deploy and operate the solution. I'm not going to walk through every value attribute on this slide, particularly because we've discussed many of them on previous calls. However, there is one that deserves more attention, and that is speed to token. At its core, the economics are fairly simple. The sooner a data center becomes operational, the sooner compute capacity comes online. The sooner compute capacity comes online, the sooner tokens can be generated, monetized, and delivered to customers. Today, there are many factors that can delay that time line. But in conversation after conversation, we continue to hear the same concern. How quickly can power be delivered to the chips? That is where Capstone's simplicity becomes a meaningful advantage. As illustrated on this slide, there are essentially 3 primary requirements to bring our system online. A concrete pad, a natural gas connection and an electrical connection. That's it. There are no extensive auxiliary systems requiring additional foundations, piping networks, or complex support infrastructure. And because of our ultra-low emissions profile, customers can often avoid emissions abatement equipment and its ongoing costs. The result is a solution that is remarkably simple, clean and fast to deploy. In a market where time to power increasingly translates to time to revenue, we believe that simplicity matters. Let's move on to our cost-out case study on Slide 7. I remember the first time I held an air bearing cartridge in my hands. The intricate EDM machining combined with the complex volute geometry produced on a 5-axis milling machine was impressive. But when I asked our engineering team what it cost, the answer blew me away. More than $970 per cartridge. My immediate reaction was simple. There has to be a better way. I challenged the team to run the component through our should-cost software. The team renegotiated with the incumbent supplier while simultaneously identifying, testing and qualifying a second source. The result was a 57% cost reduction while eliminating a significant sole-source supply chain risk. Simultaneously, we were able to lower product cost, reduce supply chain risk and add capacity to support future growth. This is exactly what we mean when we talk about leaving no stone unturned in optimizing the business. With that, I'll turn the call over to John to review our financial results in more detail.

Thank you, Vince, and good afternoon, everyone. Before reviewing the individual line items on Slide 8, I'd like to provide some context around our first quarter performance. Q1 was another step forward in the ongoing improvement of our earnings profile. Although revenue decreased year-over-year due to lower product shipment volume and reduced rental utilization, we grew gross profit dollars, expanded gross margin by 8 points, delivered positive operating income, and recorded our fourth consecutive quarter of positive net income and ninth consecutive quarter of positive adjusted EBITDA. The margin improvement was driven by the sale of previously rented microturbine systems, which more than offset the higher service costs this quarter relative to last year. Our product cost reduction programs continue to strengthen unit economics and our continued management of SG&A allowed nearly all the additional gross profit to flow straight to the bottom line. Looking ahead, we're focused on sustaining the cost improvements, strengthening performance and service on rentals, and converting our robust commercial pipeline into revenue, earnings, and cash flow. Let's move to Slide 9. Total revenue for the first quarter was $24.9 million compared to $27.9 million in the prior year period. Product and accessories revenue was $13 million compared to $15.7 million in Q1 fiscal '26. The decrease primarily reflected lower product shipment volume. As a reminder, product revenue in any given quarter is influenced by the size and delivery schedules of individual customer orders. Rental revenue was $2.2 million compared to $4.2 million in the prior year period, primarily reflecting lower fleet utilization amid uncertainty surrounding oil prices. These decreases were partially offset by parts and service revenue, which increased 14% to $9.7 million from $7.9 million. Despite the lower top line, gross profit increased 16% to $8.8 million from $7.6 million, while gross margin expanded approximately 8 points to 35% from 27%. The improvement reflected a favorable product mix, including the sale of previously rented microturbine systems, the continued benefit of our cost reduction initiatives, and the contribution from distribution services. Product and accessories gross margin increased to 31% from 8% in the prior year period. While the sale of previously rented systems provided a favorable mix benefit, the year-over-year improvement also reflected the impact of the product cost reductions we have implemented. Parts and service gross margin was 41% compared to 53% in the prior year period. The decrease reflected higher claims under our Factory Protection Plan contracts and increased shipments of our higher-cost parts associated with warranty claims, offset by the positive contribution from distribution services. Rental gross margin was 36% compared to 52% in the prior year period, reflecting the impact of lower fleet utilization. Research and development expenses were $1.2 million or approximately 5% of revenue compared to $800,000 or approximately 3% of revenue in the prior year. The increase reflected continued investment in product enhancements, cost reduction initiatives, and technology development, including the company's 800-volt DC microturbine solution for AI data center applications, 5 ppm combustion liner and other development programs. Selling, general, and administrative expenses were $6.6 million compared to $6.9 million in the prior year period. The decrease reflected lower legal, consulting, rent, and bad debt expenses, partially offset by our investment in our sales capabilities. The combination of higher gross profit and disciplined operating expenses resulted in operating income of approximately $1 million compared to an operating loss of $200,000 in the prior year period. Net income was approximately $37,000 compared to a net loss of $700,000 in Q1 fiscal 2026. Adjusted EBITDA, a non-GAAP measure, was $2.7 million in each of Q1 fiscal '27 and Q1 fiscal '26. The reconciliation to net income is included in today's earnings release and in the appendix to this presentation. Reported net loss per share was $0.03 compared to reported net loss per share of $0.04 in the prior year period. Although we generated positive consolidated net income, the calculation of earnings available to common stockholders included a $1 million non-cash reduction for cumulative paid-in-kind dividends accrued on the Series A convertible preferred. This resulted in a net loss per share. Now let us turn to Slide 10 for a review of select balance sheet and cash flow items. Cash and restricted cash totaled $32.3 million at June 30, '26, compared to $28.9 million at year-end. Accounts receivable was $12.8 million on June 30, 2026, essentially unchanged from year-end. Total inventories, including current and non-current inventories were $29.9 million on June 30, '26, compared to $24.8 million at year-end. The increase reflected purchases of materials, accessories, and parts to support sales during the quarter, including long lead time materials to support future sales. This is an area we are managing carefully, with the objective of maintaining sufficient inventory to support customer deliveries while improving inventory turns and avoiding any unnecessary use of working capital. Accounts payable and accrued expenses were $26.4 million on June 30, compared to $24.6 million at year-end, primarily reflecting the level of purchasing activity and timing of vendor payments. Overall net cash provided by operating activities was $5.4 million compared to net cash used in operating activities of $1.6 million in the prior year. Q1 operating cash flow included a $3.7 million customer deposit associated with an order scheduled for delivery at the end of this year. Excluding that deposit, the quarter still demonstrated a significant year-over-year improvement in operating cash flow. Net cash used in investing activities was $1.4 million compared to $100,000 in the prior year period. The increase reflected deferred acquisition costs and expenditures for property, plant and equipment, including rental assets. Net cash used in financing activities was $600,000 compared to $300,000 in the prior year period, primarily due to finance lease repayments and treasury stock activity. Finally, I want to address our exit notes, which have an outstanding balance of $25.3 million and mature on December 2026. Given the progress we've made in our business, we believe we have a range of options available to us. We are evaluating these alternatives to refinance or repay the exit notes ahead of their maturity. We look forward to updating you all once we have something definitive to report. In summary, our financial priorities continue to be product cost reductions, margin improvement, converting inventory into revenue and strengthening our cash generation. With that, I'll turn the presentation back to Vince.

Thanks, John. Moving to Slide 11, we continue to make meaningful progress on our top 4 technology investments, and I'd like to briefly highlight where we stand today. We continue to run our 800-volt DC unit, and we have had a number of prospective customers witness the demonstration unit operating in real-world conditions. This work is allowing us to think beyond the original application of 800-volt DC in data centers. We believe distributed generation could realize tremendous benefits from direct current generation at the local source. As more technologies migrate to DC operation, including LED lighting, electronics, battery systems, and other modern loads, the vision Thomas Edison originally had for widespread DC power may finally come full circle. And frankly, that's a pretty exciting thought. Turning to our 5 parts per million combustion liner, we are now preparing the test protocols for cold weather testing. Moving to the C250 engine program, development continues to progress and we have begun constructing our third test unit. Along the way, we are learning valuable lessons regarding the stator design and what we believe can improve both capacity and reliability for both the C250 and C200 engine platforms. On the heat recovery module, we are building our second prototype. This version incorporates cost reduction measures as well as new design features that we believe could further improve performance. Beyond these 4 programs, learnings from the liner and the C250 work have launched a broader efficiency initiative targeting incremental gains across the system. Individually, each of these improvements may be modest, but collectively they add up. The common thread across all these initiatives is simple. Challenge long-held assumptions, relentlessly pursue efficiency, and continue extracting more value from every component in the system. I know that for several quarters we've talked about the work we're doing to improve scalability in the factory. Sometimes a picture is worth a thousand words. So here it is on Slide 12. This slide shows three examples of investments we made in our manufacturing operation: our vertical lift machine, our tube bending capability and our in-house decal system. Each addresses a different part of the operation, but the objective is the same. Reduce wasted motion, lower cost, improve productivity, and increase our ability to scale. Importantly, several of these investments are now delivering returns well above our original expectations. No single project transforms a manufacturing operation. Extraordinary results come from getting hundreds of small things right day after day. That continuous improvement mindset is helping us build a more efficient, more scalable, and more profitable Capstone. Moving to Slide 13. Operationally, we continue to make considerable progress across the organization. We're improving factory flow, enhancing product quality, reducing product costs and strengthening supplier readiness. In fact, as soon as we wrap up today's call, I'll be getting on a plane to meet one of our largest suppliers to discuss production ramp-up strategies. We have now increased the number of megawatts on our factory floor by nearly 4 times while maintaining a disciplined approach to capacity expansion. Importantly, we have the ability to further increase production by adding shifts. The plans, resources, and infrastructure required to do that are already in place. However, we will only activate those plans as customer demand becomes committed. That discipline allows us to align supplier capacity, labor, quality systems and working capital with confirmed customer orders rather than building fixed costs ahead of demand. We believe that provides a more efficient path to growth while protecting profitability. As we look through the balance of fiscal ' 27, our priorities remain clear. First, continue delivering profitable growth across diversified end markets. Second, further improve gross margins through product cost reductions and operational rigor. Third, strengthen operating cash conversion through disciplined working capital management. And finally, continue advancing our mission-critical technology initiatives. We have built the foundation, we have strengthened the business and now our focus is execution. We know where we're going, we're committed to the work it takes to get there, and we're ready for what comes next. And with that, let's move to the Q&A session.

[Operator Instructions] Your first question comes from the line of Eric Stine from Craig-Hallum.

So maybe if we could just talk about some of the commercial momentum. I know not given specifics in terms of orders and backlog, but I would love to kind of get a sense of how things are trending, maybe by end market and what type of visibility that gives you over the remainder of the fiscal year.

Yes, sure. It's something we've been talking about in terms of the different end markets. Obviously, oil and gas has had a little bit of a slowdown. We saw that in the rental revenue. We had a number of megawatts that came off rent. We expected those to come back a lot faster, but some geopolitical things happened and it certainly has created some question marks around that. So that's one area that certainly I think has had an impact, but the interest in behind-the-meter for the commercial and industrial space, I think, still remains strong. It's just odd that the CapEx dollars are not being released as fast as we expected. So the pipeline's not shrinking, it's growing, but it is taking longer than we expected for some of these deals to come over the line. We are -- we do continue to see projects that are growing in megawatts, which that also could be the reason why these are taking a little bit longer. The other thing that we're seeing is there's more interest in the energy-as-a-service offering, whether it's a lease-to-own model, which we can move rather quickly on, but the power purchase agreement model, that seems to be gaining some significant interest as well. And when you get into PPAs, they just take longer to get done.

Got it. And so I mean, I guess remainder of the year, I mean, is it fair to say you expect things to be solid. I mean, whether it's similar to this quarter or not, but clearly positive given that you are expecting margin improvements throughout the year as well.

Yes, I think that's true. The first quarter tends to be a softer quarter, although when we normalize out what happened last year with the big 6-megawatt order and then the big order we had this year on the rental buyout, we actually saw some growth in the first quarter on the product side. The rental revenue hurt us a bit. But yes, we expect that the remaining quarters to track along and hopefully deliver what our expectations would be based on the pipeline that we're seeing.

Okay. And maybe just for my second one, I know that you're committed to not necessarily talking about things unless it's something firm that you can discuss in data centers. But anything in terms of whether it's size of pipeline, quality of conversations, number of counterparties, anything along those lines would be great.

Sure. And look, let's -- a lot of the questions that are coming in online, I think every other question is around data centers. And we were even bashed to stop talking about decal printers and talk about data centers. But the reality is this. We need to get this business positioned and pointed north. We think we've done that. And that's why things like decal printers and other initiatives we've done that get our costs in line so that we can handle that kind of growth is really important. But I would say that I personally spend at least 30% or more of my time every week on data center calls and data center opportunities. We've got the team working really hard. The types of deals now that we're seeing, they're moving into those phases that are more meaningful. And like you said, we're not to -- we can't give guidance and we're not going to produce a pipeline or a backlog like that, but we're very excited. We feel like when we look at pricing in the marketplace, it does seem to be that everybody's catching up to us. And when the customers start to do the real TCO models, we're winning. And so it's just a matter of time for us to march down the field and get some of these over the goal line.

Capstone will now answer a few of the questions that have been submitted from the webcast audience. Please go ahead.

Thank you. John, will the $25 million Goldman note be extended?

Our plan is not to extend that note. We are working on a refinancing option on the commercial banking side.

Vince, has there been any evidence of price increases leading to lower volumes or softer volume being attributed to seasonality exclusivity?

Good question. We did have a price increase last year and surprisingly, I don't think that softened any of these orders. We didn't lose any deals because our prices went up. As a matter of fact, as I mentioned in response to Eric's question, we're starting to see the market come towards us. And so I don't think we're seeing anything that's softening volumes as a result of price increases.

How have pilot programs and other R&D initiatives trended since Q4? And has there been any substantial steps forward in any of them? And are there any customers the firm views as potential anchor customers?

Yes, we've made some good progress. As a matter of fact, just 2 weeks ago, we were on the phone with the CTO of a major infrastructure player in the data center space, and they are developing these 1.5 to 3-megawatt BDC labs. And we see great alignment there. And so it was a very good conversation. So we're moving the ball forward when it comes to doing some of these pilots. And quite frankly, some folks are just saying, I don't need a pilot, I just need megawatts. So -- but overall, I don't know if I would see that as an anchor customer as much as I would see it as an anchor partner. So we're pretty excited with some of those pilots that we're working on right now.

Is Capstone expecting to buy out any more distributorships?

Well, like we've said in the past, our goal is to not get rid of distribution. I like to look at it just like any other employee. If you're performing well, there's a retainage strategy. If you're not performing well, we put you on a PIP. And so those -- that's been our approach. But yes, there's going to be opportunities for distributors, mainly where they're looking to either retire or sell the business. And if it does make sense to bring it into the Capstone fold, we're going to take a good look at that. So it is possible that we will pick up some more territory. We've learned a lot from the California West territory. I think the transition's gone really well and it's given us a really good insight and a closer pulse to the customer base and what's happening in the market. So -- but our goal is not to get rid of distribution. We're not going to fix anything that's broken. But those that are broken, yes, we will fix that.

Can you discuss the 6.6-megawatt North Carolina swine waste-to-energy project, specifically the level of odor reduction being achieved in addition to the power generated? Given the broader challenges livestock facilities face around odor waste, and environmental impacts, do you see this type of application representing a larger addressable market for Capstone Energy+?

Well, Kim, I love that question because as probably many of you have seen in some of our press releases, we're big fans of the circular economy. To me, that's the best way you can be a renewable source is taking waste streams and converting them into something useful. And at the end of the day the animal waste is a big deal, groundwater contamination, odor, all of those things. And there's a lot of great technology that converts that waste into a useful syngas. And that's the really neat thing about the microturbine is it has the ability to operate a wide load range that many other pieces of equipment can't. And that's what makes it useful and allows the asset to be fully utilized. So we think it's a great opportunity. We think it's a great market to be in and we'll continue to pursue those.

Thank you. That concludes the questions we've received from our webcast audience. Thank you to everyone who submitted a question and for your continued interest in Capstone Energy. We have no further questions at this time, so I'll now turn the call back over to Vince for his closing remarks.

Thanks, Kim. As I reflect on who Capstone was, who Capstone is today, and who we will continue to become, I'd like to share a simple thought. Without value, discipline becomes rigidity. Without value, urgency becomes pressure. Without value, focus becomes selfishness and we can't have any of that. And without value, consistency can become routine. That's kind of boring. But when we are anchored in value creation, real value creation, those same qualities become leadership multipliers. They give us the courage to dare greatly. They understand that extraordinary results are rarely achieved without getting the hundreds of little things right day in and day out. And when we create value, we build trust. When trust exists, we're comfortable taking calculated risks, learning from our mistakes and they do happen, trust me. But we iterate our way to success rather than expecting perfection on the first attempt. It is this very culture of delivering value that is helping us make the strides necessary to become the very best version of Capstone that we can be. When we step back and we look at where the company stands today, it's remarkable to see how far we've come. Two years ago, our primary focus was stabilizing the business. Today, we are entering the next phase from a position of strength. We have built a stronger financial foundation. We now have a scalable manufacturing model capable of supporting future growth. The opportunities ahead of us are simply amazing. And we believe we are better positioned than ever to capitalize on them. But I will say here and now, we will not do deals for the sake of doing a deal. We will not buy projects for the sake of an order or backlog. We've seen that movie before and it doesn't end well. Patience is what is required so that we may profitably grow, which in turn allows us to reinvest in the business and deliver stronger shareholder value. We wish to not have investors that are betting on us. We wish to have investors that believe in us. Our team remains focused, working with a sense of urgency, consistency, and discipline. We are competing on a stage of industry giants with hundreds of years of experience. But we are mighty. Our simplicity and technology elegance allows us to play on the very same stage and win. So thank you for your time, for your patience and your belief in Capstone Energy+. May you all have a great rest of your day.

This concludes today's call. Thank you for attending. You may now disconnect.